[video] Macro Notebook 10/14: China, Europe & Gold

European Banking Monitor: Swaps Tighten on Expectations of D.C. Resolve

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .

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European Financial CDS - Europe's banking system continues its winning ways. Swaps across European financials tightened another 14 bps, on average, last week, bringing the median EU bank to 140 bps, as compared with 101 bps for the US Financials.

Sovereign CDS – Sovereign swaps tightened around the world last week on rising expectations that the US will find a solution and avert default. US swaps tightened 7 bps, falling to 34 bps. Portugal, Italy and Spain saw their swaps tighten by 48, 20 and 8 bps, respectively.

Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.

Please join the Hedgeye Financials Team, Jonathan Casteleyn and Josh Steiner, for a deep dive Black Book presentation on the mergers and acquisition environment (M&A) with implications for companies including Greenhill & Co (GHL), Lazard (LAZ), and Evercore (EVR). The call will be held on Monday, October 14th at 2:00pm EDT.

The M&A environment continues to have a positive setup with:

1.) High cash balances on corporate balance sheets

2.) Low corporate borrowing costs

3.) Relatively high stock currency values

4.) Rising CEO confidence

Thus the market has the potential to break out of a 3 year flat environment. Every quarter removed from the Financial Crisis without substantial volatility is a quarter closer to a more robust M&A environment which has positive implications for this group of small and mid-cap Financial stocks.

Last week we indicated that the key measures we were watching for signs of risk rising are the interbank overnight rates. On that front, the news was resoundingly positive. The TED spread compressed by 3 bps to 19 bps (-16% W/W), while Euribor-OIS tightened by 2 bps to 12 bps (-13.5% W/W). This suggests that the Financials are setting up for another rally.

The other news on the week was, of course, JPMorgan's 3Q earnings. On that front, we were impressed with the resilience of the top line, particularly the positive trend in the NIM. Credit quality remains another key driver and we expect these two dynamics will be the principal themes of this quarter's earnings season.

* Sovereign CDS – Sovereign swaps tightened around the world last week on rising expectations that the US will find a solution and avert default. US swaps tightened 7 bps, falling to 34 bps.

* European Financial CDS - Europe's banking system continues its winning ways. Swaps across European financials tightened another 14 bps, on average, last week, bringing the median EU bank to 140 bps, as compared with 101 bps for the US Financials.

1. U.S. Financial CDS - Big banks saw their swaps largely unchanged last week, trading in a range of +2 to -2 bps. JPMorgan posted the best results with the -2 bps. GS the worst, at +2 bps. Mortgage insurers widened by 22 bps, on average. Overall, swaps widened for 14 out of 27 domestic financial institutions.

Tightened the most WoW: SLM, AIG, COF

Widened the most WoW: AGO, MBI, RDN

Tightened the most WoW: AXP, WFC, COF

Widened the most MoM: MBI, RDN, MTG

2. European Financial CDS - Europe's banking system continues its winning ways. Swaps across European financials tightened another 14 bps, on average, last week, bringing the median EU bank to 140 bps, as compared with 101 bps for the US Financials.

4. Sovereign CDS – Sovereign swaps tightened around the world last week on rising expectations that the US will find a solution and avert default. US swaps tightened 7 bps, falling to 34 bps. Portugal, Italy and Spain saw their swaps tighten by 48, 20 and 8 bps, respectively.

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.

11. Markit MCDX Index Monitor – Last week spreads widened 12 bps, ending the week at 101 bps versus 89 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

Takeaway: Over the weekend, Kate Space got major exposure on Amazon, and also had promotions on eBay. AMZN maybe we understand…but eBay? Not exactly the place to be for an aspirational luxury brand. We're not thrilled with this development.

"'The acquisition has turned out better financially — from a team standpoint and from an integration standpoint — than I could have predicted,' the president, chairman and CEO of Wolverine World Wide Inc. told Footwear News in a phone interview.

"Overall, Sperry Top-Sider proved to be a big winner, posting double-digit increases for the 16th consecutive quarter. Krueger said that while the brand’s U.S. growth could slow, international opportunities — including a recent agreement with E-Land Group to distribute both Sperry and Keds in China — will fuel expansion. 'There’s a lot of runway in front of us yet,' the CEO said. 'It’s an opportunity that will sustain itself and grow every year.'"

"Addressing overall industry challenges, Krueger admitted the retail climate could weigh on the company in the fourth quarter, but he affirmed that Wolverine is prepped."

"As VF sets an ambitious goal for Vans to reach $2.9 billion in sales within the next four years — a 70 percent spike from the $1.7 billion in sales it expects to make this year — the unit is relaunching its juniors apparel division as a young contemporary brand for next spring."

"Under the leadership of a new vice president of apparel, Vicki Redding, and an influx of new women’s designers and merchandisers, Vans is moving past its previous 14-year-old customer to an older crowd between the ages of 16 and 24."

"Vans still has a way to go with its women’s business, as well as apparel overall. Clothing made up 20 percent of Vans’ business last year. Of that share, women’s claimed only 20 percent. Bailey said the target is to double the apparel business by 2017."

Takeaway: VFC is sticking behind its lofty goals for Vans. Not sure we love the idea of a juniors line to fuel the growth. But in the end, it can probably run a $200-$300mm juniors line at a respectable margin.

Tiffany, in a filing with the Securities and Exchange Commission, said it had 'received numerous communications' indicating that Swatch views their watch agreement as 'terminated as of October 1, 2013.'”

"Accordingly, the luxe jeweler said it is 'proceeding on that basis with plans to design, produce, market and distribute Tiffany & Co. brand watches through alternative arrangements.'”

"The two companies formed a 20-year strategic alliance in 2007 that created a new Swiss-based firm to produce, design and market luxury watches under the Tiffany name."

Takeaway: If this is not a kick in the gut to Tiffany, I don't know what is. It's used to being the prom queen. But it just got dumped.

"The premium brand, best known for its travel, business and lifestyle accessories, has signed a licensing deal with David Peyser Sportswear Inc. to design, develop and distribute Tumi outerwear for men and women."

"...the collection, which will launch for fall 2014...will range from $295 to $695."

"Tumi will open a 6,000-square-foot showroom to showcase the outerwear at 463 Seventh Avenue. It is scheduled to open by the end of the year, when the first pieces from the collection will be launched."

Takeaway: Seriously??? Are they going to make apparel out of the same kevlar-like material that they use to make those bullet-proof briefcases?

"Dick’s Sporting Goods grand-opened three new stores on Friday, bringing the total store count to 541 in the U.S."

"The chain opened a store in Redding, Wash., at the Redding Hilltop Center, its 30th store in the state of Washington. A new opening in Victorville, Calif., at The Mall of Victor Valley, marks the 31st Dick’s store in California. And in Kansas, at the Midstate Plaza in Salina, Dick’s opened its eighth store in the state."

Takeaway: The last thing that DKS should be doing is adding more stores. It should be figuring out why it can't comp.

"Despite Men's Wearhouse Inc.'s rejection of a $2.3 billion unsolicited bid, Jos. A. Bank Clothiers Inc. and its private equity partner Golden Gate Capital will continue to seek a friendly, negotiated agreement, according to a source familiar with the situation."

"The source would not rule out a scenario of Jos. A. Bank sweetening its offer to entice the target to the negotiating table, but added that Jos. A. Bank and Golden Gate are not interested in bidding against themselves."

"Sears Canada is getting ready to introduce the first-ever Black Friday sale in Canada to accompany Canadian Thanksgiving in October."

"'Our customers already participate in our Black Friday sale in November so we wanted to give them one that, in a similar style to the U.S., would accompany our own Thanksgiving Holiday,' said Doug Campbell, president and CEO, Sears Canada. 'With the variety of sales being offered in stores and online they can pick up new home essentials or even get a head start on their Holiday shopping.'"

"On Friday the company said it would begin including recommendations that Google+ users make in advertisements. The new policy kicks in on Nov. 11."

"Here’s how it works: You use Google+ to rate some product or service. It turns out the company behind that product wants to advertise on Google. When the company purchases an ad, your friends will see a version that includes your photo along with what you said about the product."

"U.S. consumers intend to spend an average of $646 on gifts this holiday season, which would represent an 11 percent increase over the $582 they planned to spend, on average, in 2012, according to Accenture’s annual holiday shopping survey."

"The Accenture Holiday Shopping Survey found that one in five consumers (20 percent) plans to spend more on gifts this year, compared to 14 percent who planned to increase their holiday spending in 2012. They also are more likely to overspend their holiday budget this year (46 percent, compared to 34 percent in 2012)."

Takeaway: One in five consumers intend to spend more this year, but they forecast an 11% rise in total spending (which would be one of the biggest holiday's on record)??? There's some flawed logic here. We'd love to know who funded the survey.

The managing director of a Bangladeshi apparel company where 112 employees died in a November factory fire was held captive by workers for 12 hours over the weekend in a pay dispute.

"Police said workers demanding salaries and severance payments locked Delwar Hossain of Tuba Group in his office for much of the day Saturday. Mr. Hossain was later released, police said. But workers on Sunday were still holding his brother-in-law as well as a Tuba factory manager, according to police."

"Workers said Tuba, a garment manufacturer that owns 12 Bangladeshi clothing factories, had closed one of its factories Friday without notifying them or providing back pay and severance. With the Muslim Eid al-Adha festival just two days away, they said they couldn't afford to go home empty-handed."

"Automated ad buying, in which marketers use computerized systems to target users based on consumer data and Web-browsing histories, is expected to increase 56% this year in the U.S. to $7.4 billion, according to a study scheduled for release Monday by Magna Global, the research and ad-buying arm of Interpublic Group of Cos."

"Such 'programmatic buying' would represent about 53% of the $14 billion U.S. market for display-related ad businesses, the company said."

"About $3.9 billion of the expected automated ad spending this year, Magna said, will be through real-time bidding, in which advertisers, through machines, automatically bid for inventory that meets their ad specifications within milliseconds of it becoming available."

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10/14/13 08:37 AM EDT

Just Another Manic (Media) Monday

Client Talking Points

CHINA

The UK relaxing some Chinese visa rules and the world marches forward despite USA Sunday talk show fear-mongering. Chinese stocks could not care less about the US media’s noise. It was up another +0.43% overnight. It's back in black for the year-to-date at +1.6%.

EUROPE

Do European stock and bond markets care about the “default risk” yip-yap overseas? Nope. Italy’s stock market is punching another year-to-date high this morning. Meanwhile, Germany’s DAX is correcting a whopping -0.18% after gaining another +1.2% last week. Take a look at Hedgeye's Q413 Macro Themesdeck on why we like Germany (DAX) more than the U.S. (S&P 500) right now. Incidentally, the SPX risk range is 1683-1708. We sold into Friday’s rip and moved back to 5 LONGS, 5 SHORTS (versus 9 LONGS, 3 SHORTS on Friday’s open). There will be plenty to do today on red if they try to freak out again.

GOLD

You’d think that if #EOW (End of the World) Republicans and Democrats were credible that Gold would be ripping higher right? Nope. It's still crashing. Gold was down -3.2% last week, and barely has a 30 basis point bid this morning. Don’t make the mistake of confusing the real risk of US #GrowthSlowing with “default risk.” They are two very different things.

Asset Allocation

CASH

50%

US EQUITIES

15%

INTL EQUITIES

20%

COMMODITIES

0%

FIXED INCOME

0%

INTL CURRENCIES

15%

Top Long Ideas

Company

Ticker

Sector

Duration

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

If the USA was going to "default", I doubt Gold would still be crashing (-25% YTD)

QUOTE OF THE DAY

“If you just set out to be liked, you would be prepared to compromise on anything at any time, and you would achieve nothing.” -Margaret Thatcher

STAT OF THE DAY

At the end of July 2013, foreign holders of U.S. Treasury securities totaled close to $5.6 trillion. China is the largest holder of U.S. debt with $1.28T, followed by Japan with $1.14T.

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